Microsoft’s second-quarter profit, sales top estimates

SEATTLE: Microsoft reported second- quarter profit and revenue that topped estimates as the company, which is looking for a replacement for CEO Steve Ballmer, benefited from Xbox and cloud-software sales.
Net income in the period that ended Dec. 31 was $6.56 billion, or 78 cents a share, Microsoft said in a statement. Sales climbed 14 percent to $24.5 billion, the highest ever for the company.
Analysts had predicted on average profit of 69 cents on $23.7 billion in revenue, according to data compiled by Bloomberg.
The world’s largest software maker is in the middle of its biggest transition in more than a decade as it seeks a new CEO, implements a reorganization and works to close the acquisition of Nokia’s handset unit.
Microsoft introduced the new Xbox One game machine in the holiday quarter and boosted sales of Web-based software such as Azure and Office 365, even as its traditional programs continue to languish along with personal-computer shipments, which posted a record drop in 2013.
“They were very good numbers,” said Kim Forrest, an analyst at Fort Pitt Capital Group in Pittsburgh, which manages $1.5 billion in assets including Microsoft shares.
“The enterprise sales area looked pretty strong. Xbox was a winner this year and sales of Windows to PC makers weren’t as bad as usual.”
Ahead of the quarterly report, shares of Redmond, Washington-based Microsoft advanced less than 1 percent to $36.06 at the close of regular trading. The stock climbed 40 percent in 2013, compared with a 30 percent increase in the Standard & Poor’s 500 Index.
Unearned revenue, which comes from sales of multiyear deals that will be recognized in the future, was $19.5 billion for the quarter, compared with the $20.5 billion average analyst projection, according to data compiled by Bloomberg.
Sales of commercial cloud programs like Azure and Office 365 more than doubled from the year-ago quarter and the company sold twice as many Surface tablets as it did in the fiscal first quarter, according to Chief Financial Officer Amy Hood.
“We exceeded expectations in both the commercial unit and the devices and consumer segment and we saw improvement in areas where frankly we needed to get better,” Hood said in an interview, citing Surface and tablets as examples.
The PC market is stabilizing, she said, with corporate shipments rising for the third consecutive quarter and consumer PCs performing better than Microsoft anticipated, although she said demand remains soft as customers choose other devices.
Most investors are more focused on the CEO search than earnings results, according to Daniel Ives, an analyst at FBR Capital Markets & Co., who rates the stock the equivalent of a hold.
The board is narrowing down candidates in a bid to make a final selection. The list includes Microsoft cloud-computing chief Satya Nadella, Ericsson CEO Hans Vestberg and former Nokia CEO Stephen Elop, as well as other outsiders, people with knowledge of the selection process have said.
“The fundamentals have taken a back seat to the CEO search,” Ives said.
Hood declined to comment on the executive change, and said she wouldn’t be providing an update on a call with analysts Thursday. Ballmer, 57, said in August that he would retire within a year. Five months have now passed, and the new CEO will be stepping in at a crucial point as Microsoft moves away from its roots as a software maker.
Revenue in the devices and consumer hardware unit, which includes Xboxes and Surface tablets, climbed 68 percent to $4.73 billion, topping the $4.05 billion average estimate of analysts polled by Bloomberg.
Microsoft sold 7.4 million Xbox units to retailers, including 3.9 million Xbox One machines in the latest quarter, the company said.
The console was the top seller in the US in December, according to NPD Group, regaining the lead after trailing Sony’s PlayStation 4 in November.
Microsoft is trying to boost growth by getting customers to adopt its Azure cloud services, which let companies store and run applications in data centers accessed via the Internet.
The company is also moving corporate customers to Office 365, which includes cloud-based versions of its popular e-mail, word-processing and collaboration programs. Revenue in that unit was $1.78 billion. Analysts’ average projection was for $1.81 billion.
The company’s contracted but unbilled balance, which reflects agreements that have already been signed and not yet billed, ended the quarter at more than $23 billion, a $2 billion increase from the previous period, Hood said.
Microsoft adopted a new financial reporting structure for the current fiscal year, organizing divisions around consumer, commercial and cloud sales instead of the company’s traditional products. That followed a July reorganization, which shuffled executives, staff and products into new groups to focus on a strategy of devices and services rather than just software.
Devices and consumer licensing revenue, which includes Windows and Windows Phone software, fell 5.6 percent to $5.38 billion.
Analysts, on average, had predicted $5.28 billion. Commercial licensing revenue, or server software and corporate versions of Windows and Office, rose to $10.9 billion, compared with an analyst estimate for $10.8 billion.
Surface sales more than doubled to $893 million, topping the $260 million estimate of Heather Bellini, an analyst at Goldman Sachs Group.
“You’ve seen strong traction on the cloud side with Azure and Office 365,” Ives said.
“The tablet cannibalization issue continues to be a major headwind for Windows sales.”